[Webinar Recap] Increasing MSP Profitability

There is nothing wrong with making a profit. That’s why we’re here —  we all want to make a profit. And if we can recoup some of the costs we incur in order to run a business, then the better our profits are.”

Is there such a thing as an MSP profitability potion? And if so, what are the key ingredients to creating such an elixir? We recently had the privilege of chatting with Rayanne Buchianico, owner of ABC Solutions, to uncover the answer to these very questions (and more). If you missed our convo with Rayanne during our webinar on how MSPs can increase their profitability (unlock your access to the recording here), not to worry. Below, we’ll recap the high points of our discussion – in particular, the four components MSPs need to boost their bottom line. In other words: the profitability potion.

Let’s get started.

Use Your PSA Software to Track Costs More Accurately

Understanding costs is the first step in managing profitability for your MSP business, and utilizing your PSA software to track costs accurately is crucial.

Whether you’re structuring SLAs based on the number of seats, devices, or services offered, it’s essential to determine the associated hard costs, i.e., “the actual dollars taken out of your company’s bank account to pay your vendor to provide those services or tools to your clients.” This includes expenses like RMM tools, cloud services, and vendor fees.

By meticulously analyzing vendor bills and establishing unit costs within contracts, you ensure that your PSA accurately reflects profitability.

In sum, accurate data entry leads to reliable reporting, which offers insights into your MSP’s financial health, thus informing strategic decisions for sustainable growth.

If the information is accurate when it goes in, it has a much better chance of being accurate when it comes back out on a report.

Measure Burden Rates to Optimize Profitability

While hard costs are defined as the costs of goods sold, including tools, licenses, and other resources directly tied to service delivery, labor costs – also known as burden rates –  encompass the total cost of an employee, such as wages, taxes, benefits, and overhead. This is typically used for pricing services competitively and increasing profitability.

Although there are many ways MSPs can determine their burden rate, Rayanne shared just two methods: a standardized percentage approach or a detailed breakdown of components.

Percentage Approach

The former is a common and simple method that says adding 30% to any annual salary in order to arrive at a burden rate is a reasonable, safe amount. Certain factors such as if an employee resides in a high or low cost-of-living city may necessitate bumping that 30% up or down by a few notches to maintain an even playing field. But generally speaking, sticking to this method will work for most MSPs.

Automated Calculation Approach

The latter method is a much more intricate and exacting calculation and involves parsing out the different components (some of which are mentioned above) that encompass the burden rate, e.g., wages, payroll taxes, benefits such as health insurance and retirement plans, worker’s comp insurance, and a portion of overhead expenses.

To help MSPs utilize this approach without having to meticulously and manually calculate every number, Rayanne built a labor and pricing Excel spreadsheet, which you can download directly from her website here, that automates most of the heavy lifting.

Regardless of which method you choose, the goal is this: Align and measure your business costs to gain insights into your operation’s financial health, which will help you make informed decisions about how to optimize service delivery processes and pricing strategies.

Now we know how much things are costing us – what do we do with this information? We want to use this data to help us for planning, budgeting, cash flow, and forecasting and pricing purposes.”

Assess Profitability Reports to Drive Smarter Business Decisions

As you know, these reports analyze your revenue against costs to underscore the financial performance of client contracts. It’s a crucial resource that allows you to assess if your service delivery is profitable (or not), and if so, how to increase that profitability. When looking at these reports, Rayanne shared that she looks for a few key things:

• Your highest-revenue earner generates substantial income or sales and thus deserves top-notch service to maintain satisfaction and recurring revenue.

• Your lowest-revenue earner might need help with maximizing or simply utilizing your service offerings and are low-hanging-fruit opportunities for upsells.

• Your most profitable customer doesn’t necessarily mean they’re the highest revenue customer. Consider the profit margin of each client to get a more accurate picture of your profitability/by client.

• Your least profitable customer is likely a demanding one that requires a lot of effort to serve and maintain their satisfaction. You may want to make a strategic business decision to upsell lower revenue earners and release the least profitable customers who are causing you a headache to alleviate that pain.

• Your profitability by contract analysis enables you to track the financial health of each client engagement, guiding strategic decisions for growth and efficiency.

Your most profitable customer doesn’t necessarily mean they’re your highest revenue customer.”

Price Your Service Offerings Competitively to Ensure Profit

There is no shortage of intricacies involved in pricing your MSP services to safeguard ongoing profitability. Luckily, Rayanne laid out a four-step process to help you determine if and how you should make pricing adjustments:

1. Determine costs, including hard costs and cost of goods sold (COGS)
2. Set desired profit margins
3. Count the units or services being offered
4. Calculate the prices accordingly

By following this simple and transparent process, MSPs are better positioned to efficiently adjust their pricing structures to reflect their costs and desired profits.

When assessing how to price your services in a manner that’s fair, competitive, and ensures profitability, it’s important to remember that not all customers are created equal. Some folks might take advantage of the entire catalogue of services you offer, while others may only use one of them sparingly.

Understanding the ins and outs of your operation and customers, and how the two are intertwined, will lead to increased profitability and ultimately, better, more informed, and repeatable business results.

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